Question 1

Nonfinancial considerations are not accounted for in capital budgeting decisions.

Accepted Answer

A) True 
 B)False  False

Question 2

In computing the return on average investment of a particular asset,the asset's annual depreciation expense may be viewed as:

Accepted Answer

A) An increase in the average amount invested over the life of the asset. 
B) An increase in the asset's carrying value each year. 
C) A recovery of the amount originally invested in the asset. 
D) A decrease in the asset's net cash flows. 
A) An increase in the average amount invested over the life of the asset. 
B) An increase in the asset's carrying value each year. 
C) A recovery of the amount originally invested in the asset. 
D) A decrease in the asset's net cash flows. C

Question 3

Most capital budgeting techniques involve analysis of net operating profits.

Accepted Answer

A) True 
 B)False  False

Question 4

[The following information applies to the questions displayed below.]
Neville Company is considering an investment of $380,000 in heavy equipment,which will enable the company to be more competitive in the construction industry.The useful service life of the equipment is estimated to be 10 years,with $30,000 salvage value.Straight-line depreciation is used.The company estimates that net income will increase by $41,000 per year as a result of the company's ability to handle a wider range of projects with the new equipment.
-The payback period for this investment is approximately:

Accepted Answer

A) 4.7 years. 
B) 9 years. 
C) 8.75 years. 
D) 5 years. 
A) 4.7 years. 
B) 9 years. 
C) 8.75 years. 
D) 5 years.

Question 5

[The following information applies to the questions displayed below.]
Newman Labs is considering buying equipment,which would enable the company to obtain a five-year research contract.The specialized equipment costs $650,000 and will have no salvage value when the five-year contract period is over.The estimated annual operating results of the project are as follows:
   All revenue from the contract and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes.
-Compute the net present value of this investment,using a discount rate of 12%.(An annuity table shows that the present value of $1 received annually for five years,discounted at 12%,is 3.605. )

Accepted Answer

A) $468,650 
B) $179,150 
C) $289,500 
D) $829,150 
A) $468,650 
B) $179,150 
C) $289,500 
D) $829,150

Question 6

The acquiring of a subsidiary company by a publicly traded company would be an example of a capital expenditure.

Accepted Answer

A) True 
 B)False

Question 7

Capital investment decisions are not affected by:

Accepted Answer

A) Income taxes. 
B) Nonfinancial considerations. 
C) Depreciation methods. 
D) Inventory levels. 
A) Income taxes. 
B) Nonfinancial considerations. 
C) Depreciation methods. 
D) Inventory levels.

Question 8

The accuracy of capital budget decisions is critically dependent on:

Accepted Answer

A) The project life span estimates. 
B) Currency exchange rates. 
C) Employee morale. 
D) Supplier availability. 
A) The project life span estimates. 
B) Currency exchange rates. 
C) Employee morale. 
D) Supplier availability.

Question 9

Capital investment proposals may not be evaluated by using:

Accepted Answer

A) The payback period. 
B) The return on investment method. 
C) The discounted cash flow method. 
D) The income statement method. 
A) The payback period. 
B) The return on investment method. 
C) The discounted cash flow method. 
D) The income statement method.

Question 10

Which of the following factors does the payback method consider?

Accepted Answer

A) Total profitability of an investment 
B) The cash flows over the entire life of an investment 
C) The timing of cash flows 
D) The initial investment 
A) Total profitability of an investment 
B) The cash flows over the entire life of an investment 
C) The timing of cash flows 
D) The initial investment

Question 11

The payback period can be determined by multiplying the amount invested by net cash flows received annually.

Accepted Answer

A) True 
 B)False

Question 12

An investment's annual net cash flow will always be equal to its:

Accepted Answer

A) Annual revenue less its annual expenses. 
B) Annual cash receipts less its annual cash disbursements. 
C) Annual revenue less its annual cash disbursements. 
D) Annual net income plus its annual depreciation expense. 
A) Annual revenue less its annual expenses. 
B) Annual cash receipts less its annual cash disbursements. 
C) Annual revenue less its annual cash disbursements. 
D) Annual net income plus its annual depreciation expense.

Question 13

[The following information applies to the questions displayed below.]
Helicopter Gear is planning to expand its product line,which requires investment of $475,200 in special-purpose machinery.The machinery has a useful life of six years and no salvage value.The estimated annual results of offering the new products are as follows:
   All revenue from the new products and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes.
-The return on average investment for this proposed investment is closest to:

Accepted Answer

A) 8.3%. 
B) 50%. 
C) 25%. 
D) 11.1%. 
A) 8.3%. 
B) 50%. 
C) 25%. 
D) 11.1%.

Question 14

The net present value of an investment proposal is the difference between the total present value of future net cash flows and the cost of the investment.

Accepted Answer

A) True 
 B)False

Question 15

The shortcomings of the payback method
What are the major shortcomings of relying too heavily upon the payback period in evaluating capital investment decisions?

Accepted Answer

The major shortcomings of the payback pe

Question 16

[The following information applies to the questions displayed below.]
Rooney,Inc.is considering the purchase of a new machine costing $640,000.The machine's useful life is expected to be 8 years with no salvage value.The straight-line depreciation method will be used.The net increase in annual after tax cash flow is expected to be $147,000.Rooney estimates its cost of capital to be 14%.(The present value of a $1 annuity for 8 years at 14% is 4.639,and the present value of $1 to be received in 8 years is 0.351. )
-Upper level managers at Rooney,Inc.are concerned that employee estimates of future cash flows from the new machine may be overly optimistic.To what dollar amount can the annual after tax cash flow fall before the investment in the new machine should be rejected?

Accepted Answer

A) $640,000. 
B) $224,640. 
C) $168,080. 
D) $137,961. 
A) $640,000. 
B) $224,640. 
C) $168,080. 
D) $137,961.

Question 17

Redman Company is considering an investment in new machinery.The details of the investment are as follows:
   The company uses straight-line depreciation for its machinery and requires a 12% rate of return.The present value of $1 for 4 years at 12% is 0.636.The present value of an ordinary annuity for $1 for 4 years at 12% is 3.037.
(1)What is the payback period? (Round your answer to one decimal place. )
(2)What is the rate of return on average investment? (Round your percentage to one decimal place. )
(3)What is the net present value?
(4)Would you advise the company to invest in this machinery?

Accepted Answer

(1)3.3 years
(2)13.6

Question 18

In capital budgeting,one may use estimates in making decisions.

Accepted Answer

A) True 
 B)False

Question 19

When using the net present value method for evaluating an investment,an increase in the required rate of return will:

Accepted Answer

A) Make it more difficult to accept the investment. 
B) Make it less difficult to accept the investment. 
C) Not affect the decision,if the length of the investment's benefits remain constant. 
D) Not be a consideration because it is not used in the net present value method. 
A) Make it more difficult to accept the investment. 
B) Make it less difficult to accept the investment. 
C) Not affect the decision,if the length of the investment's benefits remain constant. 
D) Not be a consideration because it is not used in the net present value method.

Question 20

The annual net cash flow of an investment refers to the excess revenue it generates over its related expenses.

Accepted Answer

A) True 
 B)False

Exam 26: Capital Budgeting

Nonfinancial considerations are not accounted for in capital budgeting decisions.

In computing the return on average investment of a particular asset,the asset's annual depreciation expense may be viewed as:

Most capital budgeting techniques involve analysis of net operating profits.

The acquiring of a subsidiary company by a publicly traded company would be an example of a capital expenditure.

Capital investment decisions are not affected by:

The accuracy of capital budget decisions is critically dependent on:

Capital investment proposals may not be evaluated by using:

Which of the following factors does the payback method consider?

The payback period can be determined by multiplying the amount invested by net cash flows received annually.

An investment's annual net cash flow will always be equal to its:

The net present value of an investment proposal is the difference between the total present value of future net cash flows and the cost of the investment.

The shortcomings of the payback method What are the major shortcomings of relying too heavily upon the payback period in evaluating capital investment decisions?

In capital budgeting,one may use estimates in making decisions.

When using the net present value method for evaluating an investment,an increase in the required rate of return will:

The annual net cash flow of an investment refers to the excess revenue it generates over its related expenses.

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

the Time Value of Money: Future Amounts and Present Values

Forms of Business Organization

Filters